Recently, I had a client call in and inquire about borrowing against their IRA.
Borrowing is more commonly associated with 401k’s, 403b’s and cash value life insurance policies.
With IRA’s, “borrowing” or taking a short term loan on your IRA is not allowed.
You are allowed to withdraw money with a 60 day grace period to put the money back; it's considered to be a 60 day rollover.
If not, you will be taxed and penalized (if under 59 ½) on the amount you took out.
Why Would You Borrow From Your IRA?
If you're in need of a quick infusion of cash but want to avoid those high interest payday loans, this could be a very effective strategy. The most common reason that people would do this is for a business or investment opportunity that would take too much time to get the funding for from a bank. Depending on your IRA custodian, you could have the cash in hand is as little as a week.
How Does the 60 Day Grace Period Work?
The 60 day grace period is considered to be a nontaxable rollover, so you are allowed to do this once every 12 month period. Please note that the 12 month period begins the day you received the check, not the day you redeposit into the IRA.
Who Might Do This?
A common scenario I see people attempt to “borrow against their IRA” has to do when they are buying a new house. If they are having trouble trying to sell their house, they think they can take a loan on their IRA for the down payment on the new home. 60 days will be here before you know it; that's why this strategy is not recommended.
Borrowing Against Your IRA Not For All
If you are considering this strategy, be extremely conscious of the 60 day window. 60 days does not mean two months and don’t think that they exclude holidays and weekends. The IRS is very strict on this and you don’t want to pay tax and penalty when you don’t have to.
If you're not confident that you can get the money back into your IRA in the 60 time window, DO NOT TAKE THE MONEY! . The potential tax and penalties do not make it worth it.
Other Words of Caution
To get money out of the IRA, you'll have to liquidate your holdings to raise the cash. That means you'll have to sell your mutual funds, stocks, or ETF's. A lot can happen in 60 days in the market, so you'll be missing out on what gains (or losses) occur in that time frame.
Other Loan Options
If you absolutely need to get a personal loan quick, there are other options. Your first stop should be your local bank. If that doesn't work out, there are online option like Lending Club that will loan you money.
Typically, you would want to explore other borrowing options. But if you have opportunity that you need to act on quick, taking money from your IRA in this fashion might be your best option.